The M&A frenzy is forcing investors to examine which deals make sense and which are vanity abetted by leverage. Remember the hype surrounding the AOL/Time Warner (NYSE:TWX) merger? Or the Daimler/Chrysler (NYSE:DCX) merger? Yet both deals failed as business propositions, and wasted shareholder time and capital. Are we seeing exactly the same thing today? Are businesses doing deals merely because they can?
Maybe. The M&A activity in the resource sector makes sense to us. At stake there are real, tangible assets, for which the demand is solid and rising. But as David Pauly of Bloomberg points out other deals have the whiff of over-confidence and panic to them.
“Companies are being forced into acquisitions,” Pauly says, “taking on the inevitable problems of forging two enterprises into one and perhaps cutting costs beyond reason to justify the prices they pay. “
“Merger proponents might say takeovers are a form of ‘creative destruction.’ The term was popularized by Austrian- born economist Joseph Schumpeter, who said innovation that wreaks havoc with established companies is necessary for long- term economic growth. At their current mad pace, takeovers may merely destroy without creating.”
Markets and Money